Canada loses in oil discount – by Claudia Cattaneo (National Post – February 10, 2012)

The National Post is Canada’s second largest national paper.

The widening discounts dragging down the price of Canadian oil are providing a glimpse at what the future looks like if new pipelines like Keystone XL aren’t built.

The discounts were adding up this week to about $30 to $40 for a Canadian oil sands barrel relative to the price it would have fetched in world markets.

It’s the outcome of rising production from Canada’s oil sands and the Bakken tight oil field in North Dakota and too little pipeline space to move it to refiners, causing oil to be backed up in the U.S. Midwest.

The surprise is that existing pipelines are filling up well before the 2015/1016 time frame, when they were widely expected expected to hit their capacity.

“We are at the wrong end of multiple discounts,” said Mike Tims, chairman of Peters & Co., the Calgary-based energy investment dealer.

“Certainly the fact that we don’t have the ability to get the oil to the best market, which is the U.S. Gulf Coast, means that at least until that bottleneck is alleviated, we are bearing more of the cost than we’d like to.”

In a report, Peters said Edmonton Par (a Canadian light oil benchmark) is trading at a discount of US$9.50 a barrel to West Texas Intermediate (the U.S. Light oil benchmark), compared to an average premium in 2011 of US$1.85 a barrel; Western Canada Select (a Canadian heavy oil benchmark) is selling at a discount of US$33 a barrel, compared to an average discount of US$16.70 a barrel in 2011.

Meanwhile, the discount between WTI and Brent has also widened, to US$18.50, the result of European refiners stocking up on oil in anticipation of sanctions against Iran taking effect in July, while WTI is softening amid high stockpiles. That discount had shrunk below $10 with news last November that new pipeline capacity would come on stream with the reversal of the Seaway pipeline.

Peters’ oil and gas analyst Cam Sandhar said the discounts are temporary and he doesn’t expect the industry to re-think growth plans.

“An average SAGD project has a break-even WTI price of US$65 to $70 a barrel, so we are not even close to people making decisions on changing project timelines.”

Still, there is mounting anger in the sector that the net effect of U.S. President Obama’s rejection of the Keystone XL pipeline from Alberta to refineries in Texas is costing Canada billions of dollars in lost revenue, while Americans are enjoying artificially low oil prices.

For the rest of this artilce, please go to the National Post/Finacial Post website: http://business.financialpost.com/2012/02/09/canada-loses-in-oil-discount/?__lsa=4a14c8e4